The company took the action... after its internal investigation raised factual issues regarding a client
transaction

Merrill Lynch statement

The inquiry centres on allegations that Mrs Stewart, a multi-millionaire businesswoman, was acting on inside information when she instructed Mr Bacanovic to sell her holding in biotech firm ImClone.

Mrs Stewart, who is also under investigation, has denied any wrongdoing.

In a statement, Merrill Lynch said it had suspended Mr Bacanovic and another employee after an investigation "raised factual issues regarding a client transaction".

Former ImClone chief executive Samuel Waksal, a close friend of Mrs Stewart, has been charged with fraud.

Shares hammered

The allegations surrounding Mrs Stewart, a household name in the United States, has dealt a blow to her clean-cut reputation and to her company - Martha Stewart Living Omnimedia Inc.

At one stage, the business - which publishes a range of hugely popular lifestyle magazines and books - was worth more than £1bn.

But the company's share price has tumbled since the scandal broke at the end of last year, wiping at least $140m from its value.

Martha Stewart is alleged to have instructed Mr Bacanovic to sell 4,000 shares in ImClone at $58 on 27 December 2001 - a day before its stock plunged after federal regulators refused to review its new cancer drug, Erbitux.

Mrs Stewart netted about $200,000 from the sale.

She says she did not have any inside information and had left instructions to sell her stock whenever the share price fell below $60.

'Tipped off'

Former ImClone boss Samuel Waksal was arrested earlier this month amid allegations that he advised family and friends to sell their shares in ImClone based on inside information.

According to court papers, Mr Waksal found out the Food and Drug Administration's (FDA) decision on 25 December, 2001, and attempted to offload nearly 80,000 of the company's shares.

The following day, family and friends sold $19m worth of ImClone stock, two days before the FDA decision was made public.